The European Central Bank raised interest rates to their highest level since 2001, triggering a jump in borrowing costs as president Christine Lagarde warned that stubborn inflation meant more increases were on the way.
The ECB raised all three of its key interest rates by 0.25 percentage points, taking the key deposit rate to a 22 year high of 3.5pc. The action is in line with expectations.
Ms Lagarde said that it was “very likely” that rates will increase again at its next meeting in July.
She repeated that the 20 country bloc still had “ground to cover” on tackling inflation, suggesting that the deposit rate was on course to climb to the record set in 2000 next month and even higher this summer.
Ms Lagarde added: “In terms of having to pause or skip, we have not discussed it at all and we have not begun thinking about it because we have work to do.”
Bond markets were spooked by revised ECB inflation forecasts that showed an upgrade to the central bank’s forecasts for the next three years.
It now predicts inflation across the eurozone will reach 5.4pc in 2023, 3pc in 2024 and 2.2pc in 2025. Ms Lagarde said inflation remained “too high for too long” and warned it would continue to “persist” in 2024.
Traders are now more convinced that rates could reach by October.
The value of the euro rose against the dollar and pound, while bond yields on two year debt spiked. Short-term bonds are more sensitive to expected movements in central bank interest rates.
The yield on two-year German bunds rose as much as 14 basis points to 3.16pc, approaching the highest level in a decade.
The euro increased 0.2pc against the pound to head toward 86p and traded at its strongest level against the dollar since mid-May.
The currency has rallied more than 10pc from below parity against the dollar last year, on bets the ECB will press on with raising borrowing costs. More increases would narrow the interest-rate differential with the Fed, which paused its rate hikes on Wednesday.
Claus Vistesen, chief European economist at Pantheon Macroeconomics, said: “The ECB just talked itself into two more rate hikes.
“We think the central bank’s inflation forecast for 2024 is too high, but the key question is whether these numbers will come down significantly between now and September.
“We doubt it, which is why we now think the ECB will deliver two more 25bp hikes, in July and September, taking the deposit rate to 4.0pc, which we think will be the terminal rate.”
Eurozone inflation declined to 6.1pc in the year to May, from 7pc in April. However, the rate remains well above the ECB’s 2pc target.
